WASHINGTON–One person believes the federal government’s student loan program is facing a $500-billion hole due to overly optimistic projections for repayments.
The assessment was made after former Education Secretary Betsy DeVos asked the CEO of the nation’s largest bank, Jamie Dimon of JPMorgan Chase, to recommend someone who could go through the numbers and offer a true evaluation of the federal student loan program. Dimon recommended Jeff Courtney, a former JPMorgan executive, who eventually produced a report that found over three decades, Congress, various administrations and federal watchdogs had “systematically made the student loan program look profitable when in fact defaults were becoming more likely,” according to the Wall Street Journal.
Courntey said he found a growing gap between what the books said and what the loans were actually worth, requiring cash infusions from the Treasury to the Education Department long after budgets had been approved and fiscal years had ended, and potentially hundreds of billions in losses, the Journal added.
The federal budget assumes the government will recover 96 cents of every dollar borrowers default on.
“That sounded high to Mr. Courtney because in the private sector 20 cents would be more appropriate for defaulted consumer loans that aren’t backed by an asset,” the Journal reported. “He asked Education Department budget officials how they calculated that number. They told him that when borrowers default, the government often puts them into new loans. These pay off the old loans, and this is considered a recovery, even though in many cases the borrowers haven’t repaid anything and default on the new loans as well.”
The Reality
In reality, the government is likely to recover just 51% to 63% of defaulted amounts, according to the 144-page report assembled by Courtney findings, which was reviewed by The Wall Street Journal.
The Journal said taxpayers could ultimately be on the hook for roughly a third of the $1.6 trillion federal student loan portfolio. This could amount to more than $500 billion, exceeding what taxpayers lost on the saving-and-loan crisis 30 years ago, the report added.
“The assumptions in Mr. Courtney’s model faced challenge by some career officials at the White House Office of Management and Budget during the Trump administration, according to Diane Auer Jones, who was deputy under-secretary of education,” the Journal reported. “The Education Department under President Biden killed Mr. Courtney’s project in late February, meaning that his model won’t be used to value the student loan portfolio.”